What The Music Industry Is Doing Right

Even before word that
Live Nation
might merge with Ticketmaster Entertainment, the Grammy Awards, held this Sunday, couldn't come at a weirder time for the music industry. Album sales are dropping, the concert business is facing a scary summer and one nominee for album of the year gave the songs away for free online without the backing of a major label.

Labels and promoters face a host of problems, ranging from digital piracy to an overbooked summer lineup. With so much in flux, it's a good time to ask: What, exactly, is the industry doing right? With that in mind, Forbes polled major labels, concert promoters and Wall Street analysts to find out what steps the industry is taking now to ensure that it survives for another decade. Here's what we found.

Music Publishers

The $7 billion publishing industry is hoping to learn from past mistakes by pushing for royalty revenues from Internet use. Though this may kill Internet radio, it will also set a precedent for publishers receiving a cut for the use of the music they own regardless of the medium.

Major Labels

Once fat cats, the labels are struggling as young consumers turn away from lucrative physical albums in favor of digital downloads. Digital music will make up 41% of sales as the music market shrinks by half a billion dollars from current levels to $9.8 billion in 2013, according to a report by Sonal Gandhi at
Forrester Research
.

Despite this, labels are still an important part of the industry. "No one knows how to find, develop and promote an artist as well as a major label," says one executive at a concert promoter who asked to not be quoted by name. While Radiohead may be able to distribute music without a label, the vast majority of bands depend on the marketing and promotion divisions to cut through to the mainstream. Though thousands of them have been let go, A&R men and women are still finding future revenue sources.

Some labels are also exploring ways to transition to becoming marketing partners with artists. "Before, record companies would use distribution as a gun to artists' heads to make long-term deals," says Randy Phillips, chief executive of AEG Live. "The smart labels are realizing that it's more like free-agency in sports, where you partner with someone for a mutual benefit."

Jimmy Iovine, the chairman of Interscope Records, received praise from several sources within the industry for being open to new distribution models. "He'll take any meeting on any new medium concept or platform," says one rival executive.

Labels have also shown a willingness to go beyond traditional music retailers and offer songs in new and untested venues. Universal, Song BMG,
Warner Music Group
, EMI and a number of independent labels have signed on to Shockhound, a site launched by teen retailer
Hot Topic
in October that sells MP3s along with band merchandise.

Hot Topic, in turn, gives labels data on what merchandise is selling well in particular regions and what small bands look likely to break out. "We have 8,000 employees that are doing some of the A&R work that the major labels used to do," says Betsy McLaughlin, Hot Topic's chief executive.

Another win: They successfully argued for variable rate pricing on Apple's
iTunes Store, the dominant retailer, which will allow them to offer short-term promotions on back catalog favorites and at the same time raise the price on current hits.

The Concert Industry

The proposed merger between Live Nation
and Ticketmaster would drastically change the live music business. But even a combined company would need to build on the steps that the concert industry has taken over the last few years to grow.

Chief among them is developing new ways to benefit from the estimated $5 billion secondary market of ticket scalpers and resellers. Promoters' gripes were simple: They were taking all of the financial risk, but not earning the outsized rewards from the steep prices of resold tickets.

Ticketmaster paid $265 million for ticket reseller TicketsNow last January to counter StubHub, the dominant ticket reseller that is now owned by
eBay
. Since then, it has signed deals with promoters to direct fans to resell their tickets on TicketsNow. The result: Promoters' revenues on tours have increased by as much as 30%.

While that's good for both promoters and ticket sellers, Ticketmaster is taking a short-term hit from outraged fans. Bruce Springsteen posted a letter on his Web site Wednesday condemning Ticketmaster for redirecting fans trying to purchase tickets to his upcoming concerts at the Meadowlands to TicketsNow while face value tickets were still available. That move prompted Rep. Bill Pascrell, a Democrat from Paterson, N.J., to call for a federal probe of the company's business practices.

Promoters and agents have also introduced greater scaling in ticket prices, which can make concerts more affordable to the average fan while also increasing the value of top of the line seats. "Honestly, for a really hot show, you can now gross as much on the best 10% of the house as from the remaining 90%," says one concert promoter.

Are there other things that the music industry is doing well? Leave a comment to join the discussion.